Investor confidence growing globally, according to Merrill Lynch Fund Manager Survey

Investors remain concerned over a “hard landing” in China, though this has calmed since last month, BofA Fund Manager Survey says.

Global investors have become significantly more confident in the outlook for growth, according to the BofA Merrill Lynch Fund Manager Survey for August. A net 72% of respondents now expect the world’s economy to pick up over the next 12 months – the survey’s strongest reading on this measure in nearly four years and a striking rise from July’s net 52%.

Investors remain concerned over a “hard landing” in China, though this has calmed since last month. More than half of the panel still identifies this threat as the biggest risk for markets and economies. However, a net 32% of investors expect China economic growth to be weaker, improvement from net 65% expecting the same last month, the survey also showed.

According to BofA Merrill Lynch’s survey, sentiment towards the eurozone has improved notably. No fewer than 88% of European fund managers now anticipate the region strengthening in the year ahead, twice the level recorded last month. Respondents increasingly view stronger growth as the likeliest solution to the eurozone debt crisis, rather than interventions by the European Central Bank.

“While global growth expectations have risen very rapidly, the good news is that cash levels remain high. Out-of-favor emerging markets offer some enticing opportunities to deploy these balances,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“The current earnings season shows global recovery reflected in European companies’ performance. With the eurozone the most undervalued major market by far, optimism on the region’s equities should be sustained,” added John Bilton, European investment strategist.

Eurozone re-enters

With macroeconomic views of the eurozone increasingly positive, investors are positioning for gains in the region’s equities. A net 20% of respondents would overweight the market on a 12-month view – this marks the survey’s highest reading on this measure in over six years and makes the region investors’ top choice on this horizon, ahead of Japan. Already, a net 17% reports being overweight currently, a 14 percentage point rise since last month.

Sentiment would improve further if a European banking union were implemented, the survey makes clear, the survey also highlighted.

GEM sentiment still sour

Investors’ weak conviction towards global emerging markets (GEM) is evident from their reported net 19 percent underweight in GEM equities. This further weakening compared to last month represents the lowest level recorded in the survey in nearly two years, even though more than three-quarters of specialist fund managers view GEM equities as undervalued.

Nonetheless, some positive GEM stories stand out from the survey. In particular, Korea (broadly referring to South Korea’s Kospi Index) has seen a notable turnaround in sentiment since last month. GEM specialists now rank the market one of their top picks (alongside China and Russia), from a net 21% underweight in July.

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